GCC lacks economic diversification strategy

Gulf hydrocarbon producers have been locked in long-term plans to use their massive oil resources to support economic diversification but they still lack a clear strategy in this respect, according to an official report.

The six Gulf Cooperation Council (GCC) countries, which pump nearly a fifth of the world’s crude supply, have recorded some achievements in diversification programmes but are facing four major challenges to realize full results, said the report by the Saudi-based Arab Petroleum Investment Corporation (Apicorp), an affiliate of the Organization of Arab Petroleum Exporting Countries (OAPEC).

“In recent years, the GCC countries have managed to articulate consensual long-term visions to guide their respective diversification agendas with the ultimate aim of leveraging non-renewable petroleum resources for sustainable development and prosperity,” said the study, authored by Ali Aissaoui Senior Consultant at Apicorp, which groups 10 Arab governments.

“While this goal is widely shared, there is neither a defined path nor a set pace to it. Most countries still have a long way to go….I have found the economic vulnerabilities of the GCC countries, which as a group depend overwhelmingly on a single and highly unstable source of income, to be helpful in defining and measuring the level of economic diversification they have achieved so far.”

Highlighting diversification in Saudi Arabia, the largest Arab economy and world’s oil basin, Aissaoui identified what he described as four main challenges to support arguments for a more rapid pace of diversification and to critically assess the effectiveness of current strategies.

These challenges are fourfold: a) climate change policies and the long-term limit to growth of petroleum exports; b) petroleum fiscal unsustainability; c) the difficulty of stabilizing the stream of oil and gas revenues; and d) the inability of the petroleum industry to provide sufficient jobs, he said.

He said the first three are medium to long-term challenges that should offer strategic opportunities, adding that the challenge of climate change policies may, however, not be so compelling as to convey a sense of urgency.

“The second challenge, that of fiscal unsustainability is serious enough to warrant action. Until recently, the vast Saudi petroleum assets were perceived to be sufficient to meet future fiscal demands,” he said.

“However, the move to embrace a future of nuclear and renewable energies underscores the realization that the remaining hydrocarbons reserves may not be enough to secure the needed fiscal revenues in the face of a fast-growing population in the GCC countries, not to mention their preservation as a much-needed source of wealth for future generations.”

Aissaoui said he believes the third challenge, which is linked to the difficulty of stabilizing these revenues, may not be as compelling.

He noted that Saudi Arabia’s capacity to influence oil markets is thought to be effective in stabilizing prices and revenues.

“However, the recent global financial crisis has highlighted the need for Saudi Arabia to rethink its fiscal risk management and to provide decision-makers with more effective tools such as a dedicated stabilization fund.”

The fourth challenge — the inability of a dominant and highly productive petroleum sector to provide sufficient jobs — is the most immediate, serious enough to warrant drastic and rapid changes, the report said.

“Hence, no matter how GCC or Saudi economic diversification policies are articulated and consensually validated, leveraging oil for the creation of more jobs should be a consistent and constant driver of policy,” he said.

“The biggest challenge, however, will be filling these jobs from a rapidly expanding domestic labor pool. This challenge can only be addressed if progress in policy formulation is matched by the pace of implementation of reforms in education and transfer of skills.”

Aissaoui said diversification efforts are not without shortcomings, adding that in the context of the GCC, the uncertainty induced by a series of issues, including the funding constraints faced by the private sector, the distorting effect of subsidies, and the lack of effective regulation are all serious handicaps.

Also, intra-GCC competition, which results in an overlap between different diversification strategies, is potentially damaging, he warned.

“The detriments can be avoided by moving more resolutely towards better coordination and focusing on regional projects with higher diversification potential,” he concluded.